State Capital Expenditure Expected To Pick Up Momentum: RBI Report
In FY21, states were able to execute only 69% of their budgeted capital outlays.
State governments budgeted a jump of 38% in their capital outlays for FY23 but their spends are yet to fully materialise, according to the Reserve Bank of India.
While the union government’s capital expenditure jumped by 50% in the first half of FY23, states registered a growth of 7%, said an RBI report on state budgets released on Jan. 16.
“States need to step up investment in H2:2022-23 to meet their budgeted target for the year,” the report said.
That momentum might just arrive, given that the fiscal outlook for states looks favourable following the recovery in their finances, which were rocked by the initial waves of the pandemic. Improvements in the financial positions of state governments since FY22 has increased fiscal headroom for undertaking higher capex, the report said.
The improvement in states’ fiscal positions was enabled by “growth in revenue collections with SGST and states’ share in the Union taxes being the top contributors”, according to the report. Non-tax revenues of states also grew at a healthy pace last year, the report said.
But capital outlays by states also tend to struggle with an overestimation problem. “In 2020-21, states were able to execute only 69% of their budgeted capital outlays,” the report said. This typically happens because state governments in India end up sacrificing capital spends in downturns to meet deficit targets, according to the report.
Over the last five years, on average, states have only been able to spend one-third of their full year spending in the first half the financial year, with more than 25% of the spending happening in the last month, according to the report. "This suggests a residual approach to spending," the report said.
Of their overall capital outlay, states tend to spend 94% on developmental expenditure. One-third of this spend goes for social services such as health, education, housing, and urban development, the report said. Delhi, Andhra Pradesh and Punjab have the highest share of education in their total capital outlay.
Capital outlays by states not only improve their local economies but also have positive spillovers on other states, the report said. "Per capita capital outlay by other states also has a positive impact on the State's own per capita (gross state domestic product [GSDP]). The positive impact on GSDP persists for at least two years," according to the report.
Financing State Deficits
Since 2017-18, the share of market borrowings used to finance states' fiscal deficits have climbed sharply and are budgeted to reach 78.1% in FY23, according to the report.
Gross market borrowings of states and union territories contracted by 12.2% year-on-year in FY22 and stood at Rs 7.02 lakh crore. This was partly driven by improved revenue collections at the state level.
Overall, the weighted average (cut-off) yield of state government securities hardened during FY23 and stands at 7.73% so far as opposed to 6.98% and 6.55% for FY22 and FY21 respectively.
Both the share of market borrowing and loans from the union government is expected to rise in the composition of state's debt in FY23, the report said. The loans especially could rise in view of the 50-year interest-free loans being provided for capital investment, it said.